PeopleSoft: Beaten but Not Quitting

Despite the overwhelming number of shares tendered to Oracle, the target's board won't budge. Final stop: A proxy battle?

By Jim Kerstetter

Larry Ellison & Co. had a nice weekend, but they could be in for a contentious holiday season. Just before 1 a.m. on Saturday, Nov. 20, the tally was officially announced: More than 60% of the outstanding shares of rival software maker PeopleSoft (PSFT ) had been tendered to Oracle (ORCL ), the Silicon Valley database giant. The total was a resounding affirmation from PeopleSoft shareholders that they believe Oracle's $24-per-share cash offer, or about $9.2 billion, represents fair value for the Pleasanton (Calif.) company.

While many analysts and investors had expected Oracle to prevail in the PeopleSoft shareholder vote, even George Bush would have wished for a margin of victory this big. And Oracle execs were quick to ask their PeopleSoft counterparts to negotiate a final deal. "We believe it is time to bring this matter to a close, for the good of PeopleSoft's shareholders, customers, and employees," Oracle Chairman Jeffrey O. Henley said in a statement.

Yet, PeopleSoft's board of directors still isn't ready to concede. In a written statement released Nov. 20, the board reaffirmed that it believes $24 per share is too low. And the board, which has rejected every Oracle offer since it made its first overture in June, 2003, including a $26-per-share bid earlier this year, shows no signs of backing down. "We are confident that in the time leading to our 2005 annual [shareholder] meeting we will continue to demonstrate PeopleSoft's superior value to our shareholders," said A. George "Skip" Battle, chairman of the PeopleSoft's board's transaction committee, in a statement.


  The gauntlet -- if any are left in this nasty 17-month hostile takeover fight -- has been thrown. Since PeopleSoft's board still controls a so-called poison-pill provision that would allow it to flood the market with new shares and make a takeover attempt too pricey even for cash-rich Oracle, it still controls PeopleSoft's fate. Oracle is attempting to get the poison-pill provision killed in a Delaware court, and both sides are due back before Judge Leo Strine on Wednesday, Nov. 24. While legal experts say courts rarely find grounds to pull a poison pill, Oracle execs hope the shareholder vote will sway Judge Strine.

What about all those tendered shares? Actually, they aren't actually being sold. The tender is more like a shareholder's promise to sell. So Oracle won't actually buy the shares until the poison pill is dropped. And in the absence of a legal ruling, PeopleSoft's board of directors makes the call on the sale. Shareholders have no direct control over it. That's why Oracle won't buy PeopleSoft shares outright until the poison pill is set aside.

So what's next? PeopleSoft Chairman Battle is all but daring Oracle CEO Ellison to mount a proxy fight to remove PeopleSoft's board of directors. By November's end, Oracle must nominate its own slate for PeopleSoft's board for the annual shareholder meeting, expected to be held in the spring.


  Expect Ellison to do exactly that. Oracle had nominated a slate for PeopleSoft's 2004 shareholder meeting but withdrew it when federal regulators attempted to stop the takeover on antitrust grounds. Since then, however, a U.S. District Court judge in San Francisco gave Oracle the green light more than three months ago, as have European regulators.

Oracle has deftly knocked down the PeopleSoft board's defensive bulwarks, one by one. Now Ellison & Co. stand at the gates. To keep fightng, PeopleSoft's board must run against the very clear wishes of its own shareholders. And that would raise troubling questions of who really owns this company: investors or an elite cadre of insiders led by the directors.

Kerstetter is a correspondent in BusinessWeek's Silicon Valley bureau

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